Fitch warns that debt-limit delay could hurt U.S. credit rating

The company says lawmakers should not use raising the nation's debt limit as leverage to get government spending cuts.

A standoff over the debt ceiling looms in Washington again. (Alex Brandon, Associated…)

WASHINGTON — As Congress again veers close to the nation's debt limit, a leading credit rating company is delivering a stark warning: Don't wait until the last minute.

Fitch Ratings said Tuesday that the U.S. could lose its AAA credit rating if lawmakers don't raise the $16.4-trillion debt limit in a "timely manner" as a possible default looms as early as mid-February.

Congressional Republicans want major government spending cuts in exchange for another debt-limit increase. But Fitch, one of three major credit-rating companies, said the debt limit should not be used as leverage.

"In Fitch's opinion, the debt ceiling is an ineffective and potentially dangerous mechanism for enforcing fiscal discipline," the company said.

For that reason, a group of House Democrats on Wednesday plan to announce legislation to eliminate the debt limit. They said Republicans are exploiting it and risking another financial crisis.

"In the old days, which weren't that long ago, both parties grandstanded on the debt ceiling," Rep. Peter Welch (D-Vt.) said. "But grandstanding is one thing. Defaulting is another, and they're prepared to do it."

Congress has increased the debt limit 76 times since 1962. But in recent years, as the budget deficit has soared, clashes over the limit have become more contentious.

Standard & Poor's downgraded the nation's AAA rating in 2011 after the last debt-limit battle. Fitch and the other major firm, Moody's Investors Service, did not. But they have given the U.S. rating a negative outlook, a prelude to a downgrade.

Fitch said Tuesday that it wasn't calling for elimination of the debt limit, just raising concerns about how it is being used.

"Fitch is not advocating any particular policy, but we are making the point that regular episodes of running up against the debt ceiling generates considerable uncertainty and undermines confidence in the predictability and reliability of the federal government as a borrower," said David Riley, Fitch's managing director for sovereign and supranational ratings.

A repeat of the 2011 brinkmanship would trigger a formal review of the U.S. credit rating because it would raise doubts about the ability of policymakers to agree on ways to reduce the budget deficit, Fitch said.

But the firm also noted that failure by Congress and the White House to agree on a plan to reduce the deficit could lead to a credit-rating downgrade later this year "even if another debt-ceiling crisis is averted."

House Majority Leader Eric Cantor (R-Va.) seized on that second point and criticized President Obama for saying he would not negotiate budget cuts with Congress in exchange for a debt-limit increase.

"It's time for President Obama to stop putting our credit rating at risk and acknowledge we need a credible deficit reduction plan attached to any increase in the debt limit," Cantor said. "It's time to come together, get to work and solve the problem."

Obama said Monday that borrowing under the debt limit pays only for spending already authorized by Congress and that lawmakers were responsible for raising the limit or risking an economically devastating default.

The U.S. technically reached the debt limit on Dec. 31. But the Treasury Department has been using what it calls "extraordinary measures" to juggle the nation's finances and buy some more time.

Treasury Secretary Timothy F. Geithner informed congressional leaders Monday that those measures would be exhausted as early as mid-February, though they could give lawmakers until mid-March. Geithner said it was difficult to be more precise because the flow of money in and out of the Treasury is more volatile during tax season.

On Tuesday, Geithner wrote to congressional leaders to say that the Treasury had initiated another of those measures, suspending daily reinvestment of a federal employees' pension plan. Treasury has said the move — essentially borrowing from the plan — would free up about $156 billion.

Once the debt limit is increased, the plan would be reimbursed, Geithner said.